Passive investor questions?

10 Replies

@David Schwan 

- What are the risks?
- What's my IRR and Cash on Cash Returns?
- What's the hold period?
- Details on the property
- Strategy for the property to maximize your returns
- What's the active partner's background

Just to name a few :)

- Fixed return vs Joint Venture

- Plan A & Plan B exits

- Developer / Active partners projected profit (my headroom on a fixed return investment)

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I think it's important to look at a lot of deals, 

learning how your current opportunity compares to all the other opportunities out there will make picking the right one for you a lot easier.

@David Schwan

Before you get to any of the technicals (which are useful and important). You want to be aligned on values.

For instance, I could find a successful operator that has a strategy built around class A units in coastal, urban markets. Despite that person's prospectus and experience, I would be unlikely to invest. This hypothetical strategy does not align with my long-term views about the market and my goals for income in up and down cycles. 

Ensure that you are close on topics of investment philosophy. I believe that superior income comes from being honest about the numbers, building in good risk assessment, and leaning on a management-forward strategy. Most of the things under their control have to do with operations, so I assure that mindset is in place before even considering an opportunity.

Look at the downside scenarios and make sure you're protected. 

Tying into that, make sure you understand the sponsor's compensation. When it's all said and done, is the sponsor earning their fair share or are they taking 50% and leaving you with the majority of the downside risk? Structure the deal so that the sponsor is motivated to perform, but if the deal under-performs the passive investors should be first to get their money back and the small profits (if any). 

Generally, the three main risk points are the deal, the market, and the team. So all of your questions should be surrounding why it is a good deal in a good market managed by a good team, as well as what measure are put in place to reduce the risks across these three points.